A budget is a plan that outlines how you plan to spend your money each month. The main purpose of a budget is to ensure that you have enough money for day-to-day spending while also preparing you for both planned and unexpected expenses like emergencies, large purchases, or retirement. Follow these five helpful tips to create an effective budget and achieve your financial goals.

Calculate Your Net Income

The foundation of your budget should be your net income, which is your take-home pay after deductions for taxes and employer-provided programs like retirement plans or health insurance. People tend to focus more on their gross salary, which makes it seem like they have more money than they actually do.

Determine Your Expenses

Once you’ve determined how much money is coming in, you can focus on how much is going out. It is important to identify and categorize all spending to determine your fixed and variable expenses. Fixed expenses include recurring monthly payments like rent, mortgage, and car payments. Variable expenses differ from month to month and can include entertainment, clothing, utilities, and more.

Set Realistic Goals

While considering your budget, it is important to set realistic short and long-term goals. Take the time to think about what you want to save for in 1-2 years. This could include a vacation, vehicle, or new home. Then you want to focus on more long-term goals that can take decades to achieve like retirement or a college fund for your child. Calculate and write down how much money you need to save to achieve each long-term goal.

Track Your Spending

It’s important to keep a detailed history of your expenses and use a system that works best for YOU. Explore expense tracking apps, stick to card payments so you can refer to your statements at the end of each month, or go old-school and write everything down. Check your spending weekly to stay on track and adjust if unexpected expenses occur.

Stick to the Plan

Financial experts recommend the 50/30/20 framework for budgeting. Now that you have listed all your financial goals and expenses, you can use this strategy to form a budget. The rule splits up your income and allocates 50% for essentials like rent or mortgage, 30% for personal expenses like dates and shopping, and 20% for saving into an emergency fund or savings account. Your budget will change over time, so it is important to review it and make adjustments to align with your current goals.